Watch Out Below, Susquehanna Downgrades Sodastream

• Sodastream International Ltd SODA shares are down 18 percent year-to-date, and have been declining after hitting a high of $23.96 on June 18.
• Susquehanna’s Pablo Zuanic downgraded the rating on the company from Positive to Neutral, while reducing the price target from $27 to $16.
• While the market has rewarded the company’s stock for the expected sales stabilization in 4Q, there has been limited focus on margin contraction and lack of visibility into 2016, Zuanic mentioned.

Sodastream’s shares climbed 6 percent on November 4, after management’s guidance reflected that sales would begin to stabilize in 4Q15, and grow in 2016. Analyst Pablo Zuanic pointed out, however, that little attention was paid to margin guidance, which implied sequential contraction of 80bps. Moreover, the lack of visibility into 2016 was not being considered.

Zuanic believes that the company continues to be in a transition phase and expects the consensus EPS estimates for 2016 to be revised downwards. The Susquehanna estimate for FY16 EPS is currently at $0.81, which is about 40 percent below consensus.

“Based on 4Q sales guidance, the rather slow syrup product relaunch, and the seemingly minimal impact the latter is having on top line, we expect at best low/mid-single digit sales growth in 2016, where there could be risk to margins (on product mix, as syrups and starter kits gain mix relevance vs. CO2 refills; and as A&P is ramped up to support the relaunch),” the analyst wrote.

Zuanic said that it would be better for Sodastream to focus on plain sparkling water with its bubble-making platform, and also focus on serving its core European markets rather than exploring the US market.

“Surely, more than about EPS models, growth of the sales base will be the main driver for the stock. But on that front we are now skeptical,” Zuanic concluded.